• HDFC securities
• 23 May 2023
• Knowledge Centre

 

Options are tradable contracts. They help investors speculate on the future direction of the stock market. It means understanding whether the price of an asset will rise or fall by a particular date in the future. On September 2022, the daily average volume of options on the NSE reached ₹150 lakh crore, rising 13% from August and setting an all-time high. This is mostly because investors were hoping for big rewards after investing in these highly leveraged instruments.

Call options give an investor the right to buy a stock while Put options give the right to sell. Options trading for beginners can be slightly complex. The good news is that implementing a few smart strategies can help both seasoned and new investors protect themselves against market risk. They also help adapt to changing market conditions. Read on.

1.    Bull Call Spread

Purchase a call option for a low-risk bullish trade if you expect the stock market to rise but do not wish to buy shares right away. Bull spreads can achieve high profits if the underlying asset closes above or at a higher strike price. In simple terms, a bull call spread is one of the best option trading strategies to pick when there is a chance of a gradual price rise to the strike price. You enter one call option at a lower strike rate and another call option at a higher strike rate so that you are covered across a range of prices.

2.    Bear Put Spread

Just like the bull call spread, the bear put spread consists of two contracts:

• One short put with a lower strike price.
• One long put with a higher strike price.

Bear put spreads are entered into when one expects the price of the underlying stock to decline lower than the strike price of the short put at expiry. Buying one put and selling another put at a lower strike helps to offset a portion of the upfront cost. Another top advantage of this strategy is that the total risk of the trade will be lowered. But it is recommended to consider a bear put spread when the volatility is expected to increase.

3.    Long Straddle

This occurs when an investor enters a call and put option on the same underlying asset at the same strike price and expiry date. It can be a strategy of choice when the forecast is for a significantly huge stock price change, but the direction is unknown.

In this case, the direction does not matter because long straddle is like speculating on the price action in such a way that you make money irrespective of the market going up or down. What should be taken into consideration is volatility. So, make sure to do your market analysis carefully to increase the chances of success.

4.    Married Put

An option trading strategy where an investor is holding a long position on a stock and buys an at-the-money put option on the same stock against depreciation price is called a married put. You will have to enter the call and put options for an equivalent number of shares at the same time. It can be used by short-term investors who believe that an asset’s price will rise but also wish to protect against short-term uncertainties. You will still receive the benefits of stock ownership with a protective put option. This can include the right to vote or receive dividends.

5.    Long Call Butterfly Spread

A bull spread and a bear spread are combined in a long call butterfly spread. The potential risk of this strategy is usually limited. A long call butterfly spread is a three-part strategy that is created by:

• Buying one call at a lower strike price.
• Selling two calls at a higher strike price.
• Buying one call with an extra higher strike price.

While the striking prices are equidistant, the expiration dates remain the same. It is the ideal strategy when the prediction is for stock price action near the centre strike price of the spread.

Other option trading strategies are protective collar, iron butterfly and iron condor. Get in touch with a brokerage firm where expert can explain each